Section 523 of the Bankruptcy Code identifies three debts you must repay:
1. Unfiled tax returns.
If you did not file a tax return for the year the debt is assessed, you cannot obtain a discharge. If you filed late tax returns, you must wait two years before you can seek a discharge.
2. Priority tax claims.
If the tax debt is a Section 507 priority claim, it cannot be discharged in bankruptcy. Priority claims must be paid in full. They include:
- A tax required to be upheld and for which the debtor is liable.
- Taxes on income and gross receipts (i.e. federal income taxes).
- Unsecured property taxes assessed prior to the bankruptcy filing.
- Some employment, excise and custom duties taxes.
3. Tax evasion and fraud.
If the court finds that you evaded or attempted to evade taxes, or that you filed a fraudulent tax return, the debt is excluded from discharge.
Everything from submitting false documentation to withholding income can constitute fraud. Failing to pay taxes over an extended period of time and attempting to defeat tax liabilities can be considered tax evasion. However, underestimating your income does not always constitute fraud or willful tax evasion.
Now that you’re clear on what cannot be included in your bankruptcy, learn more about the debts that can be discharged here.
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